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NEB Chair Has Warning for the Industry

NEB Chair Has Warning for the Industry

The chairman of Canada's National Energy Board, Ken Vollman, has fired a shot across the bows of the international natural gas community, urging it to do more than count the profits from today's high prices.

In an address to a capacity crowd at a Calgary conference attended by delegates from 38 countries, Vollman urged the industry to ask itself the same questions beginning to trouble consumers and politicians --- and try coming up with answers for its own good. He wondered aloud: Are current high prices just another spike? Have markets climbed to new plateaus? Are supplies reliable? Are the prices danger signs? Should actions be taken to make sure of reliability, such as switching back to long term contracts?

Vollman raised the questions in an address to the 2000 International Pipeline Conference and Technology Exposition. The NEB chairman urged the crowd to think about whether the industry is rapidly entering an entirely new era requiring fresh adaptations to a changed market environment.

Vollman urged the industry to ask itself if the time for relying on markets dominated by short and spot sales to generate all the answers is ending. "Energy prices have more than doubled in a short period," and "price-cap proposals" are proliferating, the NEB chairman pointed out. "It is becoming increasingly difficult in this environment to arrive at negotiated solutions."

"It may take a few years to write a new heading" that defines the changed era oil and gas now seem to be entering. He stressed that the industry still has a chance to engineer favorable characteristics for its next phase, as long as it can avoid disorder that alarms the buying side of energy markets.

In an interview, Vollman said he and the NEB have not concluded that current high prices are more than another brief event in the "market-oriented" era's recurring spikes. But he said this peak has been so dramatic that he has to send the industry a message. "People are just assuming the environment they're operating in will continue." The NEB chairman's message is simple and direct: "Think about it."

Vollman predicted "the next year or two will determine what we write into the box (describing the new historical era). How will we have reliable supplies at acceptable prices? If there are disruptions this winter, there is going to be increased pressure on politicians to do something..... perhaps intervene." The forthcoming heating seasons will be a test of free markets. "Governments are committed to free trade and deregulation. That will continue as long as it serves the public interest well."

The industry needs to think about whether using "market instruments" such as longer contracts are needed to encourage supply development as well as inject an element of stability into periods of tightness. He said the industry's reliance on short-term trading of natural gas is becoming an issue as efforts get under way to tap new supply basins in Alaska and the Canadian Arctic. "Can we bring these into being with short-term market instruments?"

Vollman's message, while delivered in politely reserved language, was stern stuff for a Canadian gas community that has viewed the new prices as a long-awaited break from hard times brought on by deregulation amid excess supplies and shortages of pipeline capacity in the 1980s. At Canada's top gas producer, Alberta Energy Co., AEC Oil & Gas president Randy Eresman has told stockholders that the promised land has been reached at last and the industry has a right to stay. In this brighter world for Canadian producers, there is no more "trapped gas" backed up behind limited pipeline capacity.

With Alliance Pipeline being completed on top of expansions by the Foothills and Northern Border systems, shipping capacity has been raised to the point where it is being transformed into a commodity - and one more likely to have its price discounted than the gas moving in the lines. "That's a change Canadian producers have been waiting over 30 years for," Eresman said. AEC had much to do with the change, as a founding sponsor of the Alliance project, which also contributed its first president, Dennis Cornelson.

Vollman's address amounted to a warning to the gas supply side to think about the headaches proliferating on the buying end of the industry. They start in the Alberta home-base of the Canadian industry, where distributor Atco Gas has applied for a winter rate increase of about 16% to pass through current market prices of about C$6.50 per gigajoule (US$4.40 per MMBtu). The increase comes on top of earlier hikes that, coupled with high oil prices, already prompted Alberta's Conservative government to tap a treasury flush with royalty revenues for a once-only citizens' energy rebate worth C$300 (US$206) per taxpayer. Similar rate increases are being felt across Canada, although only Alberta has the gas-royalty revenues to offset them with a political plum.

Atco executive vice-president Jerome Engler said "the price we are now paying for natural gas certainly reflects what is happening to energy prices throughout North America. The proliferation of pipeline capacity means Canadian consumers wind up paying as much as American counterparts. Canadian deregulation policy pledges the NEB not to interfere with exports unless domestic consumers can prove they are unable to obtain supplies on terms competitive with purchases by U.S. buyers."

Gordon Jaremko, Calgary

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